Despite its promotion from frontier to emerging market status, activity on the Qatar Exchange is still more muted than in other bourses in the region.Published in MEED, 26 November 2014

One event above all others has dominated the Qatar Exchange (QE) for the past year and a half, and that is the upgrade of the bourse from frontier to emerging market status by US-based index provider MSCI.

The promotion had been a long time coming. It was back in 2007 that the country was first placed on a watchlist for a potential upgrade, and MSCI confirmed the upgrade in June 2013, a full year before it was due to take effect. That announcement prompted some international investors to start buying into the exchange for the first time, helping to drive up the market in the second half of last year and the first half of this year.

Perhaps counter-intuitively, the immediate response from investors, when the upgrade finally went ahead on 2 June this year, was to sell off, with the main market index, the QE Index, losing 14 per cent of its value by the end of that month. That drop was attributed by market observers to investors deciding to book some profits after the sustained period of growth.

Since then, however, the market has recovered all of the lost ground and risen further. Indeed, it has been hitting record levels this year. The QE Index began the year at 10,664 points, and on 8 September, it closed at 14,109 points, far above the level it was at before the market crashed in June 2008, after peaking at 12,433. Subsequently, it suffered another fall in September from which it has yet to fully recover. At the time of writing, the index was at 13,692 points and heading north once again.

There is little doubt that people in Qatar are pleased about the upgrade. “This is an important development, not only for Qatar’s financial services sector, but for the wider business environment,” says one senior finance industry figure in Doha.

However, it is worth pointing out that Qatar makes up only a tiny portion of the overall MSCI Emerging Market Index. The index includes more than 800 companies from 23 countries and just 10 were added from Qatar in June. Those 10 included five banks (Masraf al-Rayan; Commercial Bank of Qatar; Doha Bank; Qatar Islamic Bank; and Qatar National Bank) and two telecoms firms (Ooredoo; and Vodafone Qatar). Making up the remaining places were Barwa Real Estate, Qatar Electricity & Water Company and Industries Qatar. Since then, one more Qatari firm, Gulf International Services, has been included.

All these companies are now on the radar of many more international investors and fund managers that manage emerging market portfolios. Those same investors are likely to look positively at the wider economic conditions in Qatar.

“Regardless of the reclassification, Qatar is an increasingly attractive proposition,” says Thomas Simmons, economist at Saudi bank Samba Financial Group. “With investors demonstrating increased discrimination between emerging markets following the generalised sell-off at the start of the year, Qatar’s macroeconomic strengths are likely to be appreciated by investors.”

In many ways that is positive, but there are also some possible downsides, as Alastair Winter, chief economist at UK investment bank Daniel Stewart, points out.

“The upgrade from frontier to emerging market status has benefited Qatar as it allows many more funds to invest there,” says Winter. “More money in can also mean more money out, of course, which equals volatility. Accordingly, Qatar faces the same risk as other emerging markets of global liquidity sloshing around in reaction to central bank actions – whether by the US Federal Reserve, the Bank of Japan, the European Central Bank or others – or just investor punting fads.”

The business performance of the listed companies on the Doha bourse has, as the market index suggests, also been broadly positive this year. At the end of October, the QE reported that the combined net profits of 42 of the 43 listed companies for the first nine months of the year was QR32.7bn ($9bn), a 9 per cent rise on the QR30.1bn for the same period last year.

The only listed company excluded from that tally was Vodafone Qatar, as its financial year runs from 1 April to 31 March. But its results also show improvement this year, albeit losses being reduced rather than profits increasing. In the six months to 30 September, the company made a net loss of QR81m compared with a loss of QR160m for the same period of 2013.

The QE is the second-largest stock market in the region when ranked by total market capitalisation, after the Saudi Stock Exchange (Tadawul). Although if the two main bourses in the UAE, the Abu Dhabi Securities Exchange (ADX) and the Dubai Financial Market (DFM), ever merged, as has often been mooted, then their combined size would eclipse the Doha bourse.

Despite its size, however, the volume of trading on the QE is relatively light. Markets that are smaller in terms of overall market capitalisation, such as the Kuwait Stock Exchange, the ADX and the DFM, all saw greater share trades by value last year, according to data compiled by the Arab Federation of Exchanges.

In addition, the Qatari market has not been particularly successful at attracting new listings in recent times. This has in fact been a problem for many exchanges around the Gulf, but while there has been an increase in initial public offerings (IPOs) in some markets this year, it has not happened in Qatar.

The DFM, for example, has seen the debuts of retail group Emaar Malls and investment firm Marka this year, and several other companies are lining up to join them on the exchange, including real estate firms Meraas Holding and Damac Properties. On the Tadawul, activity has been even better. The IPOs there this year have included National Commercial Bank and Umm al-Qura Cement Company, among others.

In contrast, the appetite for new listings in Doha appears far more subdued, with just one firm making its debut on the market so far this year. Mesaieed Petrochemical Holding Company, a subsidiary of Qatar Petroleum, joined the market on 26 February. The shares were sold only to nationals at QR10.2 a share – a low price designed to encourage locals to invest and as a way to redistribute wealth among the country’s citizens. The price spiked on entry to the market, reaching as high as QR73.9 at one point, but since late August, it has been trading in a range between QR31 and QR34.

In part, the lack of new listings is a reflection of the differing dynamics in Qatar’s economy compared with those of other Gulf states. While Dubai and, to a lesser extent, Abu Dhabi have made a point of developing into regional financial hubs, Doha’s economy and its financial centre are more inward looking and designed to serve the domestic market’s needs. In addition, there are other options for companies wanting to raise money.

“Banks in Qatar have plenty of liquidity so IPOs are not a necessary route for companies to raise capital,” says Simmons. “That being said, I would have thought it is in the authority’s interests to encourage listings as the current 43-firm exchange is relatively small in this regard and would benefit from additional liquidity.”

As well as promoting IPOs, the authorities have also been taking a series of measures to try and boost investor interest over the past few years. These have included raising the foreign ownership limits on listed stocks to 25 per cent in most cases, adjusting the trading hours of the exchange and expanding the number of brokerage firms. There have also been some technical changes to how shares are traded, with the introduction of ‘delivery versus payment’ and direct market access schemes for foreign brokers. The bourse has also introduced liquidity providers (LPs) to the market – companies that act as market-makers in different stocks.

“Liquidity provision is an important development for us,” said Rashid bin Ali al-Mansoori, CEO of the QE, at a seminar for investors in mid-October. “Improving liquidity is one of the key components in our overall market development strategy and the LP regime is an important element in helping us achieve this goal.”

International focus

The QE has also been trying to drum up international investor interest in the exchange, using the MSCI upgrade as a lever. In May, executives from the exchange along with the senior management of some of the listed companies went on a roadshow to New York and London to meet fund managers based in the two cities. And transparency – an important issue for many international investors – is also increasing. As of 4 January next year, the QE has promised to start daily disclosures of shareholders who hold 5 per cent or more of a listed company’s capital.

But even with all these reforms, there are some who think the prospects for Gulf stock markets, including Qatar’s, are not all that bright. According to UK-based Capital Economics, economic growth levels are expected to soften in the region in the coming years and the firm also expects oil prices to remain low for some time. This will weigh down on petrochemicals firms, which make up a large chunk of the region’s equity markets. As well as Mesaieed Petrochemical Holding Company, listed Qatari companies with exposure to the chemicals sector include Qatar Industrial Manufacturing Company and Industries Qatar.

Overall, the upgrade to emerging market status may be followed by a period of more muted activity for the QE. “The Qatari stock market rallied strongly ahead of the upgrade to emerging market status, but it wasn’t out of kilter with stock markets across the rest of the Gulf,” says Jason Tuvey, Middle East economist at Capital Economics. “For instance, the Tadawul enjoyed a similarly sharp ascent. Looking ahead, a period of lower oil prices and softer economic growth means we doubt the stock market will go on another tear.”